Oil-Dri Corporation of America (ODC) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Oil-Dri Corporation of America earnings conference call. My name is [Nakaya] and I will be your operator for today. [OPERATOR INSTRUCTIONS]. I would now like to turn the call over to Mr. Dan Jaffee, President and Chief Executive Officer. Please proceed, sir.

Thank you, Nakaya, and welcome everybody to our fourth quarter and fiscal 2006 year-end teleconference. I'd like to introduce who all is in the conference room. We've got Andy Peterson, our CFO, Charlie Brissman, our VP and General Counsel, and Ronda Williams, our Director of Investor Relations. Ronda, do you want to cover the Safe Harbor?

Sure! Absolutely. Thanks Dan. Welcome, everyone, again. On today's call, comments will contain forward-looking statements regarding the Company's performance in future periods. Actual results in those periods may materially differ. In our press release and our SEC filings, we highlight a number of important factors, trends, and uncertainties that may affect our future performance. We urge you to review and consider those factors in evaluating the Company's comments and in evaluating any investment in Oil-Dri stock. Thanks again, Dan, back to you.

Thanks, Ronda. I would like to make a few introductory comments and then I'm going to turn it over to Andy, and as always we're going to spend the majority of our time reacting and responding to the topics that are foremost on your mind through our question and answer session.

I've been hitting this drum beat pretty consistently for the past few years, anyway. Certainly internally for the past 5 years, externally probably for the past two or three years. That drum beat being, what we look at as one of our key metrics of success, which is our revenue per ton. And we look at it, we have finite resources, we have finite capacity, and to the extent we ship a million tons out, which is about what we've been doing pretty consistently for the past six fiscal years. We then track the revenue we get in for that million tons. And obviously our desire and focus and goal is to get more dollars per ton shipped. This can be done in two ways, either switching people to higher value-added applications and also through pure price increases.

In the past 12 months, I would say price increases were a bigger driver than they had been in the prior 48 months, let's say. As we all know when hurricane Katrina and Rita hit at the beginning of our fiscal year, it sent a lot of the world fuel markets into turmoil and certainly we were impacted by that even though we have our forward hedging strategy. We always target to buy about half of our forward needs in fuel. And so the other half floats with the world markets. And it buffers the volatility, but it certainly doesn't eliminate it.

So lacking at what we were able to do from a price per ton standpoint, and again some of this is maybe hard to follow on a teleconference, but there's always the transcripts you can go back to and try and track what I'm saying and that should jive with what we've said in prior years, but we got really focused on extracting more value per ton of clay about 5 years ago, but I'll go all the way back to fiscal '01, we were doing a million tons-ish, and we were at about $156 a ton around to the nearest. The next year only about $158 a ton on that same million tons, the next year $169, then $180, then $190, and this year we hit $202.

You can see that we have had a steady increase and I can tell you that all the senior management team, myself included, and I'm sure my father would even buy into this line of logic, that standing back in fiscal '01 if we said earn going to raise our price by almost $50 a ton off the base of $155, and we were standing there with a million tons, how many tons would we have one, two, three, four, five fiscal years later? Nobody would have predicted we would have kept a million tons. And there's a lot of ups and downs, you've got the condition of the cap plant, but you have the closing of the Christmas Valley, Oregon plant. If you go back in our news releases walking away from a big block of tonnage that was not all that strategic for us in '02, and so you take out all the noise, and the bottom line is that we had a million tons six years ago, and we have a million tons now, and we've raised the price by about $50 a ton, and I I think that speaks heavily to a couple of things. First of all, it speaks to the management team being able to take the guidance, the direction, and then go execute it in the field to the extent that we were able to communicate very clearly to our customers why these increases were necessary, but it also speaks to the health of the market.

You can explain things all you want, but if someone else is out there trying to sell it at a lot lower price, same quality, same value, you're not going to get it. On the other hand that isn't the case. There are efficiencies that are -- that are accrued to us as being the certainly the domestic leader in sorted minerals. We like to think we're the world leader in marketing and manufacturing sorted mineral. But it also speaks to the high quality nature of our products. They are not commodities and the only time they tend to get commodotized is when we let ourselves fall into that trap. We have been spending a lot of money, a lot of time and resources out at our innovation center breaking out of the commodity mold.

Being able to understand the value our products will bring to our customers, communicate that value, and then obviously trying to participate in that value through better pricing. So we feel, , despite all the things you'll see in the numbers, up, down, sideways, one time non-cash charges, all the things that can go into try and confuse an investor as the controlling family and the largest investor, we feel very, very good about our investment in Oil-Dri, that we're in healthy markets, we have a healthy position in that market, and we have a very, very good senior management team and then filtering all the way down through all of the ranks, the entire Oil-Dri team, all 800 strong of us are well-positioned to take advantage of those two positive things. So, from my standpoint, again, continue to be very optimistic about the future.

Andy, I don't think I stole too much of your thunder. I tried to stay at 50,000 feet. Maybe you can bring us down to 20,000 feet.

Thanks, Dan. I view our fourth quarter results as strong, given the continued difficult operating environment brought about by much higher energy costs in fiscal 2006 compared with 2005.

We had record sales for the fourth quarter of $51.694 million, up 12% from last year's $46.017 million. Net income in the quarter of $1.141 million was about the same as last year with EPS of $0.16, up $0.01. Last year's EPS would have been $0.01 lower if stock option compensation had been recorded like it was this year. Looking at the balance sheet and cash flow in fiscal 2006, the Company bought back $7.811 million worth of common stock and paid out $2.403 million in dividends. As a result of the Company's continued effort to buy back stock, fully diluted share outstanding for the year were 3% lower than in the prior year. This positively impacted fiscal 2006 EPS by $0.02 a share. At year end, the Company still had the availability to buy back 316,000 shares under the current program.

Cash provided from operating activities for the year was $10.635 million, down from last year's $12.985 million. This was due to 12% higher fourth quarter sales and the impact of much higher energy prices being reflected in the cost of inventory. However, the recent trend was positive with $7.261 million of cash provided to operating activities in the fourth quarter compared with $5.166 in the fourth quarter of fiscal 2005. Cash and investments at year-end was $25.855 million, up from last year's $19.435 million.

Looking forward to next year, in keeping with its historical practice, the Company has equitably adjusted all outstanding stock options to reflect the September 8th 5-for-4 stock split. Under financial accounting standard 123, this will result in a pretax non-cash compensation charge of $1 million. $500,000 of this charge will impact fiscal 2007. With the balance spread over subsequent years. Back to you, Dan.

Great, thanks Andy. Nakaya, at this time, we'd like to open it up to the Q&A session. And as always, I would like to encourage participants to prioritize your questions, because we do limit the call to an hour, and so that you ask a question and then get back into the queue, that allows everybody to get a chance to get at least a question in before they have to go on to their day and their schedule. So Nakaya, can we open it up?

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of [Ethan Starr], a private investor. Please proceed.

Good morning. I would like to start by thanking you and the board for the dividend increase, and also congratulations on what I think is a good year considering the energy price gyrations.

Thank you.

For the last couple of years, capital expenditures have either equalled or depreciation and amortization and I'm wondering what cost savings and/or productivity benefits have resulted from this spending?

Okay. Good question. Yeah, I mean for the year, we spent about $10 million in CapEx. And we try and divide these up into different buckets. We've got repair and maintenance type issues, things that are infrastructure based or quality, health safety. And then we have what we call investment spend. And fortunately, this is what we like to look for, we're spending the majority of our dollars on investment. So in the year, well over 60% of those dollars went towards investment.

Now, obviously, the payback is not immediate. It takes time to see the benefit of that. But this being sort of an excessively heavy CapEx year, I had a feeling that question was going to come up. We have done things, for instance, our head count company-wide, we did $200 million in sales this year. And, give or take, I always used the number 800, but the reality is we have about 760 full-time employees. Back 5 years ago we were doing 150 million, we had over 800 employees.

So our, our revenue per employee has done nothing but go up, and what we've eliminated in the process are the worst jobs, the back breaking the lifting 50 pound bags and palletizing, we've gone to pretty much without exception, I think, automated palletizing, which takes away that job, which not only makes life better for our employees, but it shows up in our operating efficiencies and in things like workers' comp. We had a 5-year low this year in workers' comp claims. And I think that's a direct result of the capital we spent.

Finally as an investor, you'd be interested in this philosophy. This is something we adopted from Deming, which is, you never want to eliminate jobs due to automation. Yes we have a reduction in our total head count, but that's because we have enough natural attrition, we have people moving, leaving, doing whatever they're doing. So anyone that was on a palletizing line that got automated, they did not use their a palletizing line that got automated, they did not use their job.

They were offered an equal job somewhere else in the plant and to the extent that there wasn't one available, the training was made available to them to take a job and maybe even a higher pay grade. It was nothing but a neutral or positive to them. Even over time, even if we had to keep extra employees, again, through natural attrition, we get back to where we were. Maybe a long-winded answer. But we have been focusing our capital very heavily on efficiency and trying to take costs out of the system.

Okay. But follow-up question to that. Why was CapEx so high in the fourth quarter? And what's the CapEx budget for this fiscal year? '07?

You want to, Andy?

Yes, in terms of the budgets for next year, we would estimate that to be about $10 million, a little bit -- slightly less than we spent this year. In terms of the fourth quarter, I think it's just the timing of when some significant capital projects got done.

What kind of significant projects?

Well, one thing, we're not going to divulge too much, just in the effort of not educating our competition. We will be, we're in the process of putting in new capacity, we haven't done this in a while, but you can rest assured because I've said this on many conference calls that before we ever put in new capacity, we make sure whatever's tying up that capacity is healthy and profitable. And we are at that point where incremental capacity was needed for this particular product line. And so when it's out and ready and unveiled and everything we'll talk more about it. But that's been very exciting. It's going to add some capacity in a very value added application for us.

Okay. I'll go back in the queue.

Okay, thanks.

Your next question comes from the line of Robert Smith with Center for Performing Investing. Please proceed.

Hi, good morning.

Hi, Bob.

I'm still looking for that year where we're going to have record net income.

Well, we did get the dividend up for you. I know you're a big advocate of that.

I love it. And I'm grateful. Thank you. It's a strong part of total returns for sure. So how are we going to get there? What about our BrickAde product?

I had a feeling you'd ask about BrickAde. I mentioned on the last teleconference sort of the quarterly trend even though it wasn't material, it gave an indication of where the product line was heading. So I updated it for the fourth quarter and let me just remind you guys where it was. Going back to the second quarter of '05, we did six tons of BrickAde sales, we then did 49, 173, 211 in the first quarter of '06, 303 in the second, 453 in the third, and we hit 514 in the fourth. So at least the trend line is still heading up.

Having said that, we're still -- we're still in the point where it could be a big success or a big nothing. I mean, it's not like we have five new customers signed up and now it's a matter of ramp-up rate and the future is guaranteed. The future of success, it really isn't that case. We've got a couple of real loyal customer advocates of the product. And then we have other people sort of skeptical that they could pay more for this input than they're used to paying and see the value.

We see the value, but in some of these instances, it's sort of ironic in the big companies, so far our success has been with the independent guys, who I think now make sense because they derive 100% of the benefit right at their location. The big guys what we're finding is some of the local guys get the benefit for efficiency gains, but a different guy back in corporate procurement gets benefit for purchase price variance. It's all divvied up. So not everybody gets the benefit all in the one location. Yet one guy has to pay for it. So we're trying to make the necessary calls at corporate and get everybody looking at the whole puzzle instead of just a piece or two. So I would still say cautiously optimistic, but not yet ready to declare a major victory on BA.

On the other hand, you asked a question, you know, how are we going to get a record year of net income? And I'm not predicting that we're going to. But I can tell you that we're going to continue pushing the price value lever. And as we've all seen the fuel and energy inputs are not only are they stabilizing, they're actually declining on a short-term period. Looking at the gas futures, you can buy natural gas now at 450 MMBtu. Only at the month because it immediately jumps up to 580 and then to 720 by December. So clearly the prognosticators are betting it's not going to be that low in the future.

But every month it now seems to be at least in the recent months been playing it out that way. We're obviously taking advantage of that. We are for half of our requirements, so again we can only take partial advantage of it. But at least for the moment, we're seeing that our price increases should start to actually equal or hopefully even eclipse the cost increases that we're suffering so you'll see some margin expansion.

Give me some metric as far as the tonnage estimates that would make this BrickAde product really meaningful?

Well, yes, I mean, certainly at the 5,000 ton level, it's a meaningful product. We're not there yet.

-- you're doing now?

We're doing 500 tons a quarter. So you could say we're at 2,000, a little more than double that again and double and a half. Now you've got something -- you know a company outside, you would start to see the benefit of that. That's the beauty of it, I mean, you could apply average margins to that 5,000 tons and you probably wouldn't do bad to apply better than average margins. But if you apply even average at 5,000 tons, you'd start to see it show up in an EPS calculation.

Okay. And just quickly, the overburden removal expense, is that something that -- where was it before?

I mean, we could go on for a long time. This is the real sense of a sore spot for us here. We're doing what is being mandated. Charlie, you want --

You capitalized it before?

Bob, as we previewed in the third quarter, this -- our change in the accounting treatment for overburden removal expenses driven by emerging issues task force report O46 --

Yeah, I understand that.

We previously accrued overburden removal expense and amortized it as the underlying minerals were mined and produced making a very long story very short. The EITF consensus requires that we now treat overburden removal expense as a typical discretionary expense that we expense as it is incurred and that's what we're doing beginning 8/1/06. At 8/1/06 we had an existing accumulated balance of about $1.6 million of accrued overburden removal expense that was accrued with the prior accounting treatment.

How many years?

How many years did that accrual represent?

Yeah. I'm just trying to get a handle on the ongoing cost of this.

Well, the ongoing cost isn't going to change from what it has been historically. I mean, typically the prepaid that we've had at the end of the years has pretty much been the same. So in terms of kind of an ongoing basis, I don't think you're going to see a significant change in that activity.

Yeah, that $1 million represented I think less than about -- certainly less than 12 months, but I would say less than 9 months of prepaid stripping, so it wasn't like it was four years or --

No big deal, really.

No.

It's no big deal, but from a matching perspective of revenues and expenses, we feel it's -- call a travesty although that's what I feel it is. It's just the way our business is run, it makes it that I'm analyzing, I certainly need to, how our monthly performance is. I need to try and go back to the way it was. That's the right way to look at it.

Doesn't change much?

No.

Okay, I'll get back in the queue. Okay, thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of a follow-up of Ethan Starr, private investor, please proceed.

Yes, regarding the BA1000, I see looking Oil-Dri is looking to hire a national sales manager for its Brick Aid product line. And does this mean that the value proposition of BA1000 that even manufacturers far from Mississippi can save money using the product?

Oh, you know, certainly what we call a blue zone is maybe a little wider than some of our other products. We feel there's enough opportunity close to our plants where we wouldn't be getting too far away from it. So certainly you've spotted that job posting, we're hoping we'll find someone in that territory so that they can be real close to the customers.

Okay. And the job posting also mentioned the possibility of additional carry on products that may be developed as part of the BrickAde business, can you tell us more about that?

Nothing at the moment. Nothing we can talk about. If BA1000, I can't say with certainly, but if BA1000 doesn't take off, the odds of the carry-on product being a huge home run are probably not that good. But a BA1000, if we're able to prove what we've proven in many lab trials to customers, and they're willing to reward that proof by placing orders, then yeah, you can probably brainstorm yourself around other products that are sort of building material type things that it could go into. So --

Okay. Is the new capacity mentioned in the previous answer related to BA1000?

Not going to answer that question.

Okay. Well I tried. In the last couple of years, Oil-Dri has devoted more efforts to its procurement activities. I'm wondering what benefit that's had. How much money has been saved thus far?

Yeah, you know, we all joke, we teased Brian and his team because Brian's very good at his metrics, which is what you'd want out of a procurement guy. For every dollar we've invested, incremental dollar, we've returned $3.24. That's been a heck of a good return. And he's budgeting for a much bigger return in '07. And I'm 100% confident he and his team will meet or exceed that budget. So it's been a rousing success on all fronts.

Could you perhaps give us actual dollars as opposed to the return on each dollar invested? How much money is saved as of the whole year?

Everyone here's shaking their head.

One, first of all, it would be very difficult to give you any sort of meaningful prediction at this stage of the fiscal year. The other thing we find, and this is something that Brian and his team have helped us learn, when we're measuring performance of the procurement function and seeing a benefit, other changes and including things as natural as commodity price increases may have an offsetting effect when you're sort of dropping them to the bottom line.

Apples, it's not necessarily apples to apples all of the time. The creation of that function, Brian's leadership of the function has been terrific improvement in the organization. We're expecting to see continued success there. But it's very difficult to ballpark for investors what that means in actual dollars until you sort of get to the finish line.

How about for last year, though? Can you tell me that for last year, roughly?

The problem is they're not audited numbers in all this. For me to start spouting the numbers. I know what they are. I think suffice it to say it's been very positive. And then, you know, the cost increases we saw would have been a lot more dramatic had we not offset a huge chunk of them with procurement savings.

Okay. What's happening with R&D and new products?

I'm not going to answer this question either. As I've said many times, you don't want to celebrate until you cross the end zone. So no celebrating at the 50-yard-line. Farrell Owens proved that. We have a lot of good things going on. We have a couple of what we call all-in initiatives where we are putting a lot of resources both in R&D and sales and marketing behind what we say are very high-growth, high-value applications for our minerals, but not ready to claim victory yet.

Okay. Can Oil-Dri clay be used to purify water?

We've looked at being improved at the Brita systems and Pur and all that, and our products do a good job on a number of things, but then they don't do a good job on other things. So it would always be a blend. The problem with all of that has been getting access to the market. So, you know, you can come up with this great water filter. But I don't think you're going to want to see us market that thing coast to coast. We've talked to, Clorox makes the Brita filter, we talk to them from time to time, they're a big customer, but they're not all that interested.

I was thinking more industrial than consumer. But I guess it's the same.

It's similar. Charlie, you have something?

You know, Ethan, as you know, we sell a lot of fluid purification products, we're always keeping water and process water applications in mind, but for the reasons Dan suggested, we certainly don't have anything that's hit so far. And can't say we see something on the horizon either. That sort of application.

Okay. Thanks, I have more questions but I'll go back in the queue.

Okay, thanks.

Your next question comes from the line of Robert Smith from Center for Performance Investing. Please proceed.

So where is everyone?

Yeah, you guys -- they just don't have any questions.

Okay. So, Dan, you gave me some numbers before I want to repeat them to see if I took them down accurately on the BrickAde. 649, 173?

Well, 6, then the next quarter 49, then the next quarter 173.

211, 303, 453, 514?

Yeah.

So at that rate, you'll be at 5,000, even if you don't accelerate by pretty much almost the end of fiscal '07, right?

Well, I can tell you, every incentive, anything I've dangled in front of Brian Bancroft he's achieved and he's actually spending time on this BrickAde opportunity. He's got a background in building materials. And yeah, that's his incentive to meet or exceed 5,000 tons. Betting against him would probably not be a good idea.

Okay. So -- all right, I just wanted to get a handle on it.

That's where it's at. That would be great.

Can you tell me what the R&D expense was for the year, especially on a comparative basis with the prior year?

It's down slightly from the prior year. When we come out with the 10-K in the next 30 days, it will -- you'll be able to see that.

And the reason that it's down?

I think it was just turnover issue of not replacing -- trying to replace people, but not getting the right people in quickly enough.

Do you have an idea, will it increase this fiscal year?

Yeah, it would expect that it would. Certainly marshalling resources behind our all in initiative. I would think that's a good -- not a huge increase, but yeah.

Are you going to increase your buyback authorization?

I think we would wait until you ran out the one we have before looking to get a new one. What'd you say we have? Like 300,000?

300,000 --

300,000 issue shares left. Until that thing starts to come close to zero, the board will take it up.

The dividend increase was really sizable, is it your intention to continue to increase the dividend based on performance?

You know, I mean, I'd say that's usually like I've always said, it's an annual thing we kind of take a look at. This was a special way of getting you a nice big increase, I think was our third conservative, maybe our fourth consecutive year of increasing.. I'd have to go back and look. It's obviously, yeah, when that's one of the major ways that the shareholders have voiced to us that they want to receive some return on their investments.

I agree and when you have a screen of the companies that have increased their dividends X number of years, it's good to be there.

I agree, I agree. So it's a fair expectation.

Okay. Some existing products, Poultry Guard.

poultry guard I would say is in limbo. It's not hurting us, but we're not getting rich off it either.

Okay. [Cam Turner]. Anything there?

Nothing new on.

I wonder when something's going to come out of that lab, but -- okay, but you're still there?

Yeah, we're still there. In fact, he turned a profit, but we haven't heard anything. We're still waiting to hear.

And you've got something in the teens as ownership?

I don't even know --

Low teens.

11.

11. Bob, you know, thanks for asking, just, you know, so we're clear. We have no expectation of getting anything meaningful out of that investment any time in the foreseeable future.

You never know, I agree. Yeah, that's not high on our radar gene. I understand that. Just circling back to Ethan's question, there's really nothing in the new product pipeline that you would want to speak about as being -- as encouraging so to speak on the lines of of the BrickAde product?

None that we want to talk about, right. We have a couple of things we're very excited about, but it's premature.

Okay. So by premature, we see the time line of where Brick was and where it is and where it could go. These other products, what kind of time line are we talking? 2-3 years?

Yeah, that's probably a good time line.

Okay. All right. Okay. I'll get back in the queue.

Okay. Thanks.

Your next question comes from the line of Ethan Starr, please proceed.

Boy, really is just Bob and me today.

Yeah.

In visiting retail stores recently, it looks like prices have gone up on the retail shelf. And I'm wondering to what extent you've been able to increase wholesale prices for cat litter?

Well, I think retail is a reflection of wholesale. So I think it's all a good sign that, there may be a substitution point for cat litter, but certainly not a 10 or 20 cents a bag at retail. So, no one I've seen has suffered at retail from having those retail prices go up. Cat litter is still moving at the same velocity it always did.

Okay. Well how about consumers? Are they shifting more to private label?

No. No. I'd say haven't seen any trend change due to the change in retail pricing.

Okay. Are there any new products or new product placement at retail in the industrial automotive area?

Yes, I mean, they're working on some things. Nothing material. They're hoping it could be material, but there's nothing -- ways of maybe putting the Oil-Dri brand name on complementary products and then seeing if that brand recognition would help those products. But at the moment, I would say not much to report on.

Okay. Can you tell us the price you paid for the forward buys for natural gas for '07?

I could if I had it, but I don't have it. Andy, you might have it.

Why don't you ask another question?

We'll come back to that. I can make up a number. We'll see what my memory is against his. I'm going to guess 986. Let's see what he comes up with. That's a guess. We're playing a game. What's your next question?

What's happening with Pro's Choice. Pro's Choice line. Are sales increasing there? Is it stock or --?

Yeah, I mean, it's -- it is one of the more competitive markets that we're in. And so we're doing well, but we've -- it's fairly fierce competition. I think it's a highly visible application. And it's projected to continue to grow as a marketplace, with all the emphasis on soccer and everything else, the need to maintain these fields is out there. We're happy to be participating in it and, you know, just -- we're holding our own, that's for sure.

Okay. You know, I certainly appreciate the dividend increase and really other than making it easier to buy back stock, I'm wondering why split the stock?

Are you asking me why? Charlie, you want to -- you've got all the theory on why to do it. So I'm not going to conjecture on that.

Yeah, even I -- without sort of going into confidential board deliberations, I think the conclusion was that this fractional split while maintaining the cash dividend rate at the opportunity to sort of give an effective increase in the cash rate while also increasing, some of the liquidity and available trading volume in the stock.

Okay. Fine. That's basically the reason I expected. But --

We got your future gas prices and I was wrong, so 863 was the weighted average price of our futures.

Well, I'm glad you're not deciding the price on that with your guess.

We're not what?

I'm glad you're not paying the price of your guess.

Oh, right, right. I agree with that. I agree. The gas is better than the guess.

What's happening on the M & A front in the industry? Any people up for sale, or any recent transactions?

I think all quiet on the western front.

Okay. Just curious. And well, the only other comments I really have at this point is it would be appreciated I don't know what happened to the press release last night, but I was kind of surprised it came out as late as it did.

Yeah, I saw your posting on Yahoo. You were wondering if a cat ate our release.

My posting? Yeah, well, I'll have to look at it. Okay. Well I'll get back in the queue.

Do we always put it out at midnight or just sometimes?

Latest I can ever recall it.

Okay, it came out at midnight. All right, we'll work on it.

Thanks.

Your next question comes from a follow-up from the line of Robert Smith with the Center for Performance Investing. Please proceed.

Okay. So I just wanted to get my arms around this natural gas thing again. So 863 was -- is the '07 futures?

Yeah.

and you do about 50% of your total buy?

Give or take, I mean, yes.

What was that number for the prior year?

Oh, God -- we'd have to look it up because maybe that was my -- no, I don't even want -- I think it was like 690. I'm guessing again, but they're looking.

We'll find it.

Item 7A last year's 10-K and we'll flip and see if we can find it.

I think it was south of 7. So that's the point is that, while that buffer the pain so that last year wasn't as bad. I was wrong it was north of 7. Don't follow me. 762.

762 -- The reality is that we're not going to see such a strong improvement in this area as a cost factor.

Well, to the tune of half, there's no question.

I see.

Yes.

And as a matter of fact it's, it's more. I mean on that 50%?

Yeah. On that 50%, it's more. And the question is how does the other half do.

So the additional question is focused on the price increase parameter so to speak as to the recapture. So where are you there based upon 863?

Well, as much as we would love to believe that our ability to communicate cost pressures is why our customers are taking price increases. I think economic laws apply. If they can get the equal product at the same quality for a lower price, they don't really care what our costs are doing. There are almost two different issues. There are our cost pressures. You have our ability to raise prices. And, you know, you're a very savvy investor. You have to decide is the trend that's been established for the last five our six years, have we hit the elasticity point?

The question is looking at '07, what are the prices -- price increases that are in place now sufficient to take care of the incremental difference between 863 and 762?

Well, you heard -- maybe you didn't. At the beginning of the call my comments were that I believe, but again, qualified them that you will see not only that we are able to keep pace with the cost increases, you'll actually see our margins start to expand again. So that -- I stand by that comment.

All right. I guess -- I did miss that coming in a couple minutes late.

Yeah.

All right. And the catalytic category in and of itself, is there anything happening that might be worthwhile for us to know about?

Yeah, I mean the major thing that's been going on for years now, but it's that compounding affect that's now taking huge chunks versus little minor bites 10 years ago is the shift from grocery, away from grocery towards mass merchandisers and pet specialty players. So, in 1970 whatever when Joe Miller launched value added Tidy Cat, 98% of the business was done in grocery. It's now down to under 40. I think it's down to 35 and dropping rapidly.

So the other 65, which used to represent 2, is now mass merchandise like Wal-Mart and Target. And pet specialty, guys like PetSmart and Petco. And then the club stores, the Sam's and the Costcos. They're doing now almost two-thirds of the business. And that's a major, major, major shift. And one that, frankly is good for Oil-Dri because we were never that good in grocery anyway. We have pockets of being strong. We have certainly key accounts that we do very well with, but we were never the national guy with a 98% ACV in every store, in every C store, you know, every retail outlet. That was never us, that was always Tidy Cat.

So we've been doing business with Wal-Mart for 30 years. We've been very focussed on the nontraditional outlets because they don't charge slotting and tend to be more focussed on that way of doing business. And so, frankly, the trend is good for us. The problem with the trend is it makes looking at national data -- I don't know if you have access to IRI or Nielson, but it makes it -- I wouldn't want to call it irrelevant, because none of the guys I mention report Wal-Mart, I don't think Target does, Walgreens doesn't, Sam's and Costco do not. PetSmart and Petco do not. None of those sales are reported. All they're getting is traditional grocery. Which if you're looking at ketchup, I'm sure is an overall measure of the ketchup category, but in pet litter it's just 35% of the industry, and you're looking at basically one-third to try to make decisions on the whole. That can be misleading.

Anything happening on the product front nationally so to speak?

Not really. Nothing earth shattering, people putting in different fragrances and different little things. Nothing major.

Okay. And just you guys are not making any projections or estimates at all now, right?

In terms of like EPS guidance?

Yeah, I mean --

No, we're not.

You've completely stepped back from that?

Yeah, that was over a year ago, so we're not getting back into that.

So in essence, you're looking at '07 as a year of continued revenue growth and margin improvement.

Yep.

So is this going to be apparent over the year? Or is it going to be weighted more in any part of the year?

Not knowing what the fuel markets are going to do, that's a tough question to answer.

Well, you know 50% of the fuel market, right?

Right.

I'm just trying to, I don't want to push you on this, but I'd like to get some kind of a feel for the quarterly picture. I mean, in other words, I'm going to have a certain expectation. I'd rather not see that expectation fulfilled in the last quarter of the year. Do you understand me?

Yeah. Sure and I'm right there with you. So you and I are in the same boat. [laughter]

Bob, I think you can be confident we are always moving for observable quarter to quarter improvement. But I think, even with 40-50% of our natural gas requirements forward, the remaining volatility and all of the other variables that go into our business, we're not in a position to do anything other than tell you that we're hoping for the same thing.

Okay. And how much is natural gas of energy?

You mean of what we use?

Yeah.

Well, what we do is we take our total energy needs and then because you cannot forward buy in any meaningful way anything that's not natural gas, we tie up half of it in natural gas. Gas represents half of our energy needs.

I got you.. All right. Well, thanks, and look forward to speak to you again soon. And good luck.

Great. Thank you.

Your next question comes from the line of Eric Cinnamond with Intrepid Capital. Please proceed.

Hi, Dan.

Hi, Eric. I'm glad, not that I was getting -- I love Ethan and Bob, but I was hoping for another question or so.

Well, mine won't be too unique, but just curious for '07, what type of gross margin would you consider to be a success?

I'm looking at our trend. Let me give you our -- these are our actuals so I'm not going out on a limb here. We're at 18% in '01, and 19 in '02, 23.3, in '03we were all feeling good. And then it dropped down to 21.5 in '05 and then down to 18.6 in '06. You know, without giving too much guidance, I would say north of 18.6, but likelihood is south of the 21.5, somewhere in that range.

Within that range, would you recover that 7 million you lost this year in increased costs to drawing the clay?

Let me do the math. I mean, that would -- to the extent we keep our sales, which I certainly intend to do and continue to grow them, making 20% on some number bigger than 205 would be more than making 21.5% on the 187 we did in '05. So the answer to that would be yes.

Okay. And then you assume that you'll be still be able to receive 202 per ton or more in '07 even if energy prices decline.

Yeah. I mean, again, if I'm you, I'm projecting better than 202. We have a 6-year trend and the magic question is have we hit that elasticity point where if we go to 203, all of a sudden our volume will crater? We don't believe that's where we are.

Okay. And are you still looking for 22-23% gross margin goal sometime down the road?

Yeah.

Okay. Great. Thank you very much.

Okay, thanks, Eric.

Your next question comes from the line of Ethan Starr, private investor. Please proceed.

Thank you. I'm wondering, can you tell us what the -- what your retail price per ton for BA1000 is?

No, we're not going to disclose individual product lines.

Oh, I see, okay. Okay. How's the Odor Eaters litter doing?

Not well.

Not well?

Nope. Not well. I think it's a great proposition, I think it falls into the same trap that we've always known. If you don't market it, consumers won't say "I wonder if there's an Odor Eaters brand cat litter, and that would really be meaningful to me." You need to run national TV. And so, it's out there and I'm sure there's customers that love it and swear by it, but unfortunately not enough of them know it's out there.

Well, yeah, and I don't want you to run national TV just for that.

No, and I don't either.

Good. Any -- I guess it's mostly in Petsmart any in Petco?

No.

Any luck in getting Odor Eaters or any product back into Target?

We would love to, no, nothing on the horizon.

Okay. Question about one of your smaller competitors. And I haven't seen it in the stores recently, I'm wondering if they're still making litter, and that's Waverly.

I think they're still making litter. Oh, but the Glamour Kitty brand? I don't know. Yeah that was their brand. They're certainly making private label litter.

Okay. Well, thank you very much, I look forward to next quarter.

Okay. Thanks.

There are no further questions in queue. I would like to turn the call back over to management for closing remarks. Please proceed.

Okay. Thanks Nakaya. Thanks everyone and, again, you guys are asking a lot of the questions that other people who are either tuning in on the web or just, you know, don't want to queue in to ask questions are going to benefit from the answers. So I appreciate Ethan and Bob your homework and questions and Eric thanks for jumping in there and asking a question at the end. And again, we're, we continue to be optimistic about the long-term prospects of our business.

Obviously everyone, myself included want to also see short-term milestones hit along the way, and we're going to continue to focus on that. We feel we took the absolute right approach in not panicking when gas prices went through the roof in '06. Obviously our forward-buy strategy enabled us to take a longer term approach at getting the prices up. And some of that benefit, no doubt was in '06. And now you'll see a little of the incremental pain in '07 from a forward-bought strategy. But our spot price should be a lot lower in '07 than it was in '06.

So when you blend the two together, as we said, I think what you'll see. And then you get two years of price increases against just one year, we're pretty confident what you'll see is not only a maintenance of the margins, but getting back to where they're growing. Not all the way to the goal of 23, 23.5, but certainly better than the 18, 18.6 we delivered in '06. So thank you, thanks for your support, and patience. And we will talk to you again in a quarter.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Good day.